Investing in property has long been a popular strategy for people looking to build wealth and generate passive income. However, before jumping into the property market, it’s important to understand positive and negative gearing.
Depending on what your financial strategy is when investing, one of these strategies, may be better than the other. Your financial adviser can give advice on which pathway is best for you.
What does positive gearing mean?
Positive gearing is a term used to describe the situation when the rental income generated from a property is higher than the expenses associated with it.
For example, if you receive $2,000 in monthly rent but only pay $1,750 in monthly repayments and expenses, your investment would be positively geared. However, it’s important to note that you may have to pay additional tax on any income generated from a positively geared investment.
Benefits of positively geared properties
Positive gearing can provide immediate cash flow, making it an attractive option for investors who are looking for regular income.
When an investment property is positively geared, the investor is making a profit from the property, which can be used to pay off the mortgage or reinvest.
What does negative gearing mean?
Negative gearing is a term used to describe the situation when the rental income generated from a property is less than the expenses associated with it.
For example, if you receive $2,000 in monthly rent but your monthly loan repayments are $2,500, your investment would be negatively geared.
Essentially this means that you, as an investor, are making a loss on the property, which can be used to reduce taxable income and potentially receive a tax refund.
Benefits of negative gearing
One of the main benefits of negative gearing is the potential tax advantages it provides. Investors can claim deductions for the loss incurred on the property, which can help to reduce an overall taxable income.
This can be particularly attractive for investors who fall into the higher tax bracket.
Claiming depreciation for positive and negative gearing properties
Regardless of how your property is geared, one of the largest deductions available to you is tax depreciation. This refers to the loss in value of a property’s assets and building structure over time. As an investor, you can claim the depreciation deduction each financial year, reducing your income tax payable and putting more money back in your pocket.
In the following example, where no depreciation is claimed, the cash-flow position of the property is negative $159.75 per month, or $1,917.00 per annum. This means the investor has to find $159.75 per month to make up the shortfall between
The income generated by the investment property and the expenses incurred. By claiming depreciation, the post-tax cash flow of the property becomes positive $192.66 per month, or $2,311.90 per annum. Remember, this is post-tax, meaning the investor is better off $352.40 net, every month.
When a property is positively geared, (rental income is higher than the expenses) then the depreciation deduction can help offset tax payable on the rental income, further increasing the net income for the investor.
On the other hand, when a property is negatively geared (rental income is lower than the expenses) then, as an investor, you may be able to claim the loss as a tax deduction against other income, such salary or wages. Other tax deductions for expenses such as interest, property management fees, and repairs and maintenance can also help offset the tax payable on the investor’s other income.
It’s important to note that the full tax laws and regulations surrounding property investment can be complex, and seeking the advice of a qualified accountant or financial advisor is recommended to ensure you are maximising your deductions and meeting your tax obligations.
However, to claim the depreciation deduction, the property investor will need to organise a depreciation schedule from a qualified quantity surveyor.
Here at Capital Claims Tax Depreciation, we are qualified quantity surveyors that specialise in depreciation and are registered tax agents. We provide residential and commercial property investors with a high-quality depreciation schedule and have been Australia-wide since 2008.
You can call us on 1300 922 220 to discuss your property or complete our simple ‘Get a Free Estimate’.